Oil Surges After Saudis, Russia Reportedly Reach Production Cut Deal; Cuts As Large As 20mmb/d "Discussed"

April 10th, 2020 Jesus Christ ✝

With the virtual OPEC+ meeting starting the headlines and notorious jawbones and trial balloons are coming in fast, and Reuters reports that Saudi and Russia have reached a deal on deep oil output cuts, according to OPEC source while a senior Russian source says the two sides have agreed to remove their main obstacles to agreeing a new deal. As a reminder, earlier we reported that the two main sticking points between Saudi and Russia was the oil production date to use as a benchmark (with Saudi wanting April and Russia a average of Q1) as well as the size of the production cuts that are to be undertaken.

While details remain scarce, according to the WSJ’s Summer Said, Russia has agreed to a deal under which it would cut 2MM B/D. And while there is no confirmation there is speculation that Saudi Arabia would cut an additional 4MMB/D; it is unclear where the rest of the cuts will come from.

Separately, a Russian source said that OPEC+ is discussing oil cuts as large as 20MM B/D, with the caveat that this figure is just for discussion, and without any details on the breakdown. To be sure, while 20MM is a significant improvement from the 10-15 number thrown around before, it is till well below the 27MM B/D hit to April demand that various energy strategists have predicted.

Yesterday, Goldman said that any cuts beyond 10mmb/d would disproportionately impact Saudi Arabia which would have to shoulder the bulk of the cuts, so we would discount this particular news, although the oil market appears to be taking it at face value and oil surged on the news, although it has since pared some of the gains as rational minds realize that a 20mmb/d cut is virtually impossible without the participation of the US which as we know is not happening, at least not today.

One wildcard to keep in mind is that as Bloomberg notes, the OPEC+ meeting has been preceded by huge political pressure from the U.S. From President Donald Trump to Republican and Democrat lawmakers, everyone in Washington has pointedly asked Saudi Arabia to cut output and lift oil prices. The American political discourse has been colored by the experience of the 1973-74 oil crisis for 50 years. Since then, the U.S. has been against foreign oil and for cheap crude. The U.S. now accepts that ultra-low oil prices aren’t in its interest.

But if Saudi Arabia is indeed aiming to crush shale as Putin recently admitted, why would Saudi Arabia agree to cut production without a similar action by the US?